Financial entities like banks will benefit from expanding margins as rates climb. A rising rate environment may reflect a strengthening U.S. economy, and a healthier economy would help borrowers have an easier time repaying loans, with banks stuck with fewer non-performing assets. Moreover, rising rates means that banks will generate greater revenue from the spread between what they pay deposit savers and the prime rates they charge credit-worthy clients and other highly-rated debt.
“When we look at the top 20 banks, we think it could positively impact their earnings by as much as 11 percent, if we get continuous rate increases through next year,” Cassidy told CNBC.[related_stories]
Financial services firms, like capital markets, banks and regional banks, are among the top three industries with the highest sensitivity to changes in the 10-year Treasury yield. Over the past few years, financial stocks have underperformed the broader equities market as the Fed’s robust quantitative easing program and low interest rate policy caused the yield curve to flatten – a yield curve flattens when yields on long-term debt declines more rapidly than the yield on short-term debt, which causes a smaller spread between long- and short-term debt securities.
With interest rates poised to rise, financial services and banks could be in for an extended period of leadership.
Financial Select Sector SPDR